Learn to invest with Buffett

Chapter 38

Chapter 6, Section 2 Stock Picking Trick [-]: Only buy stocks of companies you know well

By restricting one's investments to a few well-understood industries, an intelligent and well-informed person can judge these risks with relative precision.

--Warren Buffett
There is an old saying in China: "If you are not familiar with business, don't do it." Buffett has a habit of not doing unfamiliar stocks.Over the years, Buffett has only focused on industries that are easy to understand, so he has always had a high level of understanding of the companies Berkshire has invested in.He suggested that investors should choose stocks within the competitive advantage circle. If the technology of an enterprise is too complicated and beyond the scope of their own understanding, it is best not to invest.

From Buffett's investment, it is easy to see his approach.He has always avoided Internet technology stocks. Instead, he favors companies in the traditional sense that he understands have brighter profit prospects, such as insurance, food, consumer goods, electrical appliances, advertising media, and financial industries.

Buffett said: "I can rationally predict the cash flow of investing in Coca-Cola. But who can accurately predict the cash flow of the top ten Internet companies in the next 25 years? For Internet companies, I know I don't know much. If we don't understand, We don't invest casually. Obviously, many companies in high-tech fields or emerging industries will grow much faster on a percentage basis than companies that are destined to do so. However, I would rather get a company that can be sure that it will achieve good outcome, and unwilling to pursue a great outcome that is only possible."

The main reason why Buffett is very keen on investing in Coca-Cola is that its business is very simple and easy to understand.

1. Coca-Cola's business is very simple and easy to understand.The company buys the raw material, turns it into a concentrate, and sells it to bottlers.The bottler mixes the concentrate with other ingredients, and finally makes Coca-Cola drinks and sells them to retailers, including supermarkets, convenience stores, vending machines, bars, etc.

2. Coca-Cola's reputation not only comes from its famous products, but also from its unparalleled global sales system.It currently generates 70% of its sales and 80% of its profits from the international market, and the growth potential of the international market is still great.The annual consumption of Coca-Cola in the United States is 395 bottles, while the per capita consumption of Coca-Cola in the world is only 64 bottles.This large gap represents the Coca-Cola Company's great potential for continued growth in the global beverage market.

In the same way, Buffett also selects other companies he wants to invest in according to this condition.Over the years, the businesses he has owned mainly include gas stations, farm reclamation companies, textile mills, chains of large retailers, banks, insurance companies, and more.No matter which company, Buffett always has a clear grasp of the operating conditions of those enterprises.He understands the annual income, expenses, cash flow, labor relations, pricing flexibility, and capital allocation of all Berkshire holdings.

Buffett said: "Let's imagine that you have been away for 10 years, and now you want to make an investment. All you know is everything you know so far, and you can't change anything when you leave. What would you think at this time?" ?Of course the business has to be simple and easy to understand, and the company has to show stability over the past few years, and the long-term outlook has to be good.”
Investment motto:

As an investor, you should make more use of unfamiliar investment concepts, and invest in companies you are familiar with during the operation.The companies you are familiar with are mainly divided into the following three types: [-]. Listed companies in your own location; [-]. Listed companies in your own industry; [-]. Listed companies with relatively familiar and easy-to-understand fundamentals.Investors are more familiar with these companies, and it is easy to make correct judgments to avoid investment risks.

(End of this chapter)